A new prudential regime for EU-regulated investment firms has been provisionally agreed. The press release can be accessed here. The provisionally agreed text has not yet been published.

Background

Until now, EU-regulated investment firms have been subject to the same capital, liquidity and risk management rules as banks, that is, the Capital Requirements Directive IV(‘CRD IV’) and the Capital Requirements Regulation (‘CRR’). These include the rules impacting remuneration structure and disclosure. This has meant that the current prudential regime does not take into account the specificities of investment firms.

The proposed changes will create a new regime which is tailored to meet the specific business requirements of investment firms and which takes into account the risks that such firms take. The new regime will consist of a new ‘Investment Firms Directive’ (IFD) and ‘Investment Firms Regulation’ (IFR).

Impact on remuneration

Once the proposals have been endorsed by the EU ambassadors and the legislative text has been published, we will issue an alert containing a more detailed summary of the impact these changes may have on remuneration within investment firms.

Although firms should consider the specific thresholds and requirements once the legislative text has been endorsed, the following structure is expected to broadly apply: The largest ‘systemic’ firms (‘Class 1’) will continue to be subject to the prudential regime for banks (that is, CRD IV / CRR) and would be supervised as credit institutions. These firms will be subject to the same remuneration requirements as currently apply to banks;

Smaller non-systemic firms will be subject to a new bespoke prudential regime.

This new regime is
expected to apply as follows:

Larger non-systemic firms (‘Class 2’) will be subject to remuneration rules adapted from those in CRD IV but a few changes are expected, possibly including the removal of the ‘bonus cap’;

Small and non-interconnected investment firms (‘Class 3’) are expected to not be subject to the remuneration rules, meaning that these firms may enjoy greater flexibility when structuring remuneration.

Next steps

The proposals will now be submitted for endorsement by EU ambassadors. The legislation will then undergo a legal linguistic revision before being sent to the EU Parliament and Council for adoption.

Tapestry comment Given that investment firms have long argued that the prudential regime applicable to banking firms is not appropriate for the risks that they take, these changes are likely to be welcomed.

We will publish a more detailed summary of the potential impact of the new regime on remuneration within investment firms once the endorsed legislative text is available, but the changes are expected to result in greater flexibility than under the current regime. This, of course, will only apply to non-systemic firms.

Those firms which are considered ‘systemic’ (that is, ‘Class 1’ firms), will continue to be subject to the existing CRD IV / CRR rules and should be aware of the upcoming CRD V / CRR II changes which are likely to impact them. Our recent alert on these changes can be accessed here.

If you would like to discuss how IFD or IFR may impact your remuneration structures, please do contact us.